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M ERCHANDISING T RANSACTIONS

Learn about the differences between service organizations and merchandising companies, including their revenue generation methods and income statements. Explore the various types of discounts, deductions from sales, and inventory methods.

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M ERCHANDISING T RANSACTIONS

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  1. CHAPTER 6 MERCHANDISINGTRANSACTIONS

  2. Service Company Income Statement For the Year Ended December 31, 1999 Service revenues $ 150,000 Expenses 137,500 Net income $ 12,500 Service Organizations vs. Merchandising Companies Service organizations sell time to earn revenue • Examples include accounting firms, law firms, and plumbing services • These have been our emphasis up to now Not a plumber!

  3. Merchandising Company Income Statement For the Year Ended December 31, 1999 Sales revenues $ 150,000 Cost of goods sold 80,000 Gross margin 70,000 Expenses 46,500 Net income $ 23,500 Service Organizations vs. Merchandising Companies Merchandising companies sell products to earn revenue • Examples include sporting goods, clothing, and auto parts stores • These will be our emphasis for the rest of the semester

  4. Transfers Products Cash or Promise to Pay Seller Customer/ Buyer Merchandising Companies

  5. Merchandising Companies • Inventory • Products held for sale • Classified as asset • Sales • Exchange of merchandise for an asset • Classified as revenue • Cost of Goods Sold (COGS) • Cost of inventory sold during the period • Classified as expense

  6. 226 Merchandising Companies CLASSIFIED INCOME STATEMENT a/k/a MULTIPLE STEP INCOME STATEMENT a/k/a “SATURDAY NIGHT” PAGE

  7. ROLL ‘EM ! Video #1 (Approx. 6 min.) Video #2 (Approx. 8 min.)

  8. 210 Merchandising Companies “Channel of Distribution” (5 points on next test) Manufacturer Wholesaler Retailer Final Customer Can manufacturer sell direct to final customer? (i.e., can green box be skipped?)

  9. 211 Accounting Terminology Sales Invoice vs. Purchase Invoice What’s the difference? prepares? Who cares?

  10. Recording and Reporting Sales Gross sales Less: Sales discounts Less: Sales returns and allowances Net sales

  11. GENERAL JOURNAL Page 74 Date Description PR Debit Credit May 13 Cash 25,000 Sales 25,000 To record the sale of merchandise for cash Recording Gross Sales On May 13, TCom sold $25,000 of merchandise for cash. If the sale had been on account, we would debit Accounts Receivable instead of Cash.

  12. Quantity sold 1,000 Price per unit $ 5.25 Total 5,250 Less 30% discount (1,575) Invoice price $ 3,675 Two Types of Discounts • Trade Discounts • A percentage deduction from the list or catalog price to arrive at the gross selling (invoice) price • Know the three reasons for using (p. 213) • Not recorded on either seller’s or buyer’s books!! Example FastBan, Inc. offers a 30% trade discount if you purchase at least 1,000 of their most popular product known as Zippy. Each Zippy has a list price of $5.25.

  13. Two Types of Discounts • Cash Discounts • A deduction from the invoice price granted to induce early payment of the amount due • Two other names for cash discounts • Sales discounts • Purchase discounts • Recorded on whose books? • Both seller’s and buyer’s books • They are pervasive

  14. Discount Percent Number of Days Discount is Available Otherwise, Net (or All) is Due In This Number of Days Two Types of Discounts • Cash Discounts • A deduction from the invoice price granted to induce early payment of the amount due • Two other names for cash discounts • Sales discounts • Purchase discounts • Recorded on whose books? • Both seller’s and buyer’s books • They are pervasive 3/15,n/30

  15. General Journal Page 61 Date Description PR Debit Credit Nov. 8 Accounts Receivable 6,000 Sales 6,000 To record the sale on account Cash (Sales) Discount Example On November 8, Borey Co. sold merchandise to West, Inc. for $6,000 on account; credit terms 2/10, n/30.

  16. General Journal Page 68 Date Description PR Debit Credit Nov. 14 Cash 5,880 Sales Discount 120 Accounts Receivable 6,000 To record cash received on account Cash (Sales) Discount Example On November 14, West, Inc. paid its account in full. Discount = $6,000 × 2% = $120

  17. Other Deductions from Sales • Sales Return Merchandise returned by the buyer as unsatisfactory or defective. • Sales Allowance A deduction from the original invoice price when the customer keeps merchandise but is dissatisfied with it.

  18. General Journal Page 68 Date Description PR Debit Credit Sales Returns and Allowances 135 Accounts Receivable 135 To record return of defective item. Sales Returns and AllowancesExample Before making a payment to you, a customer returns $135 of goods sold on account.

  19. Sales discounts and Sales returns and allowances are Contra Revenue accounts. Partial Income Statement Gross sales Less: Sales discounts Less: Sales returns and allowances Net sales

  20. Inventory Methods • Perpetual Method • Periodic Method

  21. Perpetual Method The inventory account is continuously up-dated as purchases and sales of inventory occur.

  22. Perpetual Method The inventory account is continuously up-dated as purchases and sales of inventory occur. More on this method in Chapter 7.

  23. Periodic Method This is the method used in this chapter. Entries are not made to the inventory account during the year. At the end of the accounting period, a physical count of inventory is needed to update the inventory account and calculate cost of goods sold. What is the mechanism for updating the inventory account? Closing entries

  24. 232 233 General Journal Page 88 PR Debit Credit Date Description Dec. 31 Merchandising Inventory (ending) XXX Sales XXX Purchase Discounts XXX Purchase Returns and Allowances XXX Income Summary XXX To close accounts with credit balances and set up proper balance in ending inventory account. Closing Entries for Merchandising Company Closing Entry #1

  25. Closing Entries for Merchandising Company Closing Entry #2 General Journal Page 88 PR Debit Credit Date Description Dec. 31 Income Summary XXX Merchandising Inventory (beginning) XXX Sales Discounts XXX Sales Returns and Allowances XXX XXX Other accounts including all expenses To close accounts with debit balances includingthe beginning inventory account.

  26. Cost of Goods Sold ...is an expense representing the cost of the inventory sold during the period. ...appears on the income statement. ...must be calculated using a multiple-step process when using the periodic method.

  27. Calculation ofCost of Goods Sold Multiple-Step Process Beginning Inventory + Purchases - Purchase Discounts - Purchase Returns and Allowances + Transportation-in = Cost of Goods Available for Sale - Ending Inventory = Cost of Goods Sold

  28. Cost of goods sold: Merchandise inventory, January 1, 1999 $ 24,000 Purchases: $ 167,000 Less: Purchase discounts $ 3,000 Purchase returns and allowances 8,000 11,000 Net purchases 156,000 Add: Transportation-in 10,000 Net cost of purchases 166,000 Cost of goods available for sale 190,000 Less: Merchandise inventory, December 31, 1999 31,000 Cost of goods sold $ 159,000 Calculation ofCost of Goods Sold Formal Income Statement Presentation

  29. General Journal Page 26 Date Description PR Debit Credit May 7 Purchases 27,000 Accounts Payable 27,000 Purchase merchandise on account Purchase of Merchandise One May 7, Barbee, Inc. purchased $27,000 of merchandise on account; terms 2/10, n/30.

  30. General Journal Page 41 Date Description PR Debit Credit May 16 Accounts Payable 27,000 Cash 26,460 Purchase Discounts 540 Payment on account Purchase of Merchandise One May 16, Barbee, Inc. paid for the purchase of May 7 in full. $27,000 × 2% = $540 discount

  31. General Journal Page 41 Date Description PR Debit Credit May 16 Accounts Payable 27,000 Cash 26,460 Purchase Discounts 540 Payment on account Purchase of Merchandise One May 16, Barbee, Inc. paid for the purchase of May 7 in full. Purchase Discounts is a Contra Purchases account. $27,000 × 2% = $540 discount

  32. Purchase Returns and Allowances The buyer returns, or accepts a reduction in invoice price of, merchandise to the seller. On May 27, Barbee, Inc. returns $200 of defective merchandise purchased on account before payment is made to the supplier.

  33. General Journal Page 88 PR Debit Credit Date Description May 27 Accounts Payable 200 Purchase Returns and Allowances 200 Returned defective merchandise Purchase Returns and Allowances The buyer returns, or accepts a reduction in invoice price of, merchandise to the seller. On May 27, Barbee, Inc. returns $200 of defective merchandise purchased on account before payment is made to the supplier.

  34. Transportation Costs Transportation-In Inward freight costs of acquiring merchandise. Transportation-In is part of cost of goods sold!

  35. Transportation Costs Transportation Out/Delivery Expense Outgoing freight costs that must be paid by the seller. Delivery Expense is a selling expense on the income statement!

  36. Who pays the freight charges? Transportation Costs • Free on Board (FOB) Shipping Point. • FOB Destination. • Freight Prepaid • Freight Collect

  37. FOB what? (Pick one) FOB Points Shipping Point Destination ABC Wholesalers Rice's Deartment Store

  38. FOB Points • FOB Shipping Point • “Free on board” at the shipping (selling) point • Title passes to buyer upon shipment • Buyer owns en route and... • Ultimately bears the cost of the freight • Assumes risk of loss in transit • FOB Destination • “Free on board” at the destination point • Seller owns en route and... • Ultimately bears the cost of the freight • Assumes risk of loss in transit

  39. Ultimately 223 Initially Bears Pays Expense Terms FOB Shipping Point - Freight Collect Buyer Buyer FOB Destination - Freight Prepaid Seller Seller FOB Shipping Point - Freight Prepaid Seller Buyer FOB Destination - Freight Collect Buyer Seller Transportation Cost Summary

  40. Ultimately Initially Bears Pays Expense Terms FOB Shipping Point - Freight Collect Buyer Buyer FOB Destination - Freight Prepaid Seller Seller FOB Shipping Point - Freight Prepaid Seller Buyer FOB Destination - Freight Collect Buyer Seller Transportation Cost Summary

  41. Periodic Method Prepare the journal entries for Jackson Co. Use the periodic inventory method. July 5, 1998 Purchased 1,000 units of inventory for $25,000 cash. July 9, 1998 Sold 300 units of inventory to a customer on account for $35 per unit.

  42. GENERAL JOURNAL Page 1 Date Description PR Debit Credit July 5 Purchases 25,000 Cash 25,000 To record inventory purchases At Cost Periodic Method

  43. GENERAL JOURNAL Page 1 Date Description PR Debit Credit July 5 Purchases 25,000 Cash 25,000 To record inventory purchases July 9 Accounts Receivable 10,500 Sales 10,500 At Retail To record inventory sales 300 units × $35 = $10,500 Periodic Method

  44. Saturday Night Page, AgainP. 226

  45. Sales $ 250,000 Less: Sales Discounts $ 3,000 Sales Ret. & Allow. 1,500 4,500 Net Sales $ 245,500 227 Classified Income Statement:Revenue Earned from the sale of inventory Alternative way to express income statement relationships? (Hint: 8th Grade) Net sales = Gross sales - (Sales disc.+ SR&A)

  46. Beginning Inventory (BI) $ 55,000 “Purchases” (P) 176,500 Cost of Goods Avail. for Sale (GAS) 231,500 Less: Ending Inventory (EI) 64,000 Cost of Goods Sold (COGS) $ 167,500 Classified Income Statement:Cost of Goods Sold Three approaches to Cost of Goods Sold: (1) Simplified Income Statement Approach (2) Equation Approach COGS = BI + P - EI

  47. Beginning Inventory $ 55,000 Purchases $ 175,000 Less: Purchase Discounts $ 6,000 Purchase Ret. & Allow. 2,500 8,500 Net Purchases $ 166,500 Add: Transportation-in 10,000 Net Cost of Purchases 176,500 Cost of Goods Avail. for Sale $ 231,500 Less: Ending Inventory 64,000 Cost of Goods Sold $ 167,500 Classified Income Statement:Cost of Goods Sold (3) Formal Income Statement Approach

  48. Net Sales $ 245,500 Cost of Goods Sold 167,500 Gross Margin $ 78,000 Classified Income Statement:Gross Margin Gross Margin = Net Sales - COGS Gross Margin is also called Gross Profit

  49. Classified Income Statement:Types of Operating Expenses • Selling Expenses • Administrative Expenses

  50. Gross margin $ 78,000 Operating expenses: Selling expenses: Sales salaries $ 26,000 Delivery expense 3,000 Advertising expense 2,000 Rent - store building 4,000 Depreciation - store equip. 2,500 37,500 Administrative expenses: Executive salaries 29,000 Rent - office building 1,600 Insurance expense 1,500 Supplies expense 1,100 33,200 Total operating expenses 70,700 Income from operations $ 7,300 Classified Income Statement:Income from Operations

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